Perpetual Motion

Australia | Dec 07 2023

This story features PERPETUAL LIMITED, and other companies. For more info SHARE ANALYSIS: PPT

In a hectic day for wealth manager Perpetual, it announced a strategic review, which immediately prompted a takeover offer, which was swiftly rejected. Brokers agree with the rejection.

-Perpetual announces strategic review
-Soul Pattinson moves in with a takeover offer
-Perpetual rejects the offer immediately
-Brokers support the rejection

By Greg Peel

Early yesterday, Morgan Stanley issued a report acknowledging the strategic review announced by Perpetual ((PPT)), which would see the company separate its Perpetual Asset Management business (PAM) from its Perpetual Corporate Trust (PCT) and Perpetual Wealth Management (PWM) divisions.

The broker suggested PAM may be undervalued by the market, and models its valuation on a sum-of-the-parts basis. Morgan Stanley believes the review could unlock upside for the stock, and has set a target price implying 25% upside.

Just a few hours after Perpetual announced the review, its largest shareholder (9.9%), investment company Washington H. Soul Pattinson ((SOL)), announced an indicative non-binding 100% takeover offer.

Soul Pattinson planned to de-merge the PAM business from PCT and PWM businesses, distributing the PAM segment back to Perpetual shareholders via an in-specie distribution, while retaining PCT and PWM in-house. It would be a scrip-offer for the retained businesses, which, using the Soul Pattinson share price at the time, implied a share price of $27.

No Thanks

Perpetual didn’t muck about and rejected the offer outright, stating the offer “materially undervalued” Perpetual and was not in the best interest of shareholders.

The implied takeover price appears to be a 20% premium to yesterday’s Perpetual closing price. However, Morgan Stanley is not the only broker to value the stock on a sum-of-the-parts basis, and JPMorgan points out compared to its SoTP valuation, the offer includes no takeover premium at all.

Issuing a report post-offer but pre-rejection, CSLA cited a lack of clarity around the valuations of each division, given the offer is non-cash, and suggested the Perpetual board was unlikely to recommend the offer.

Jarden noted the implicit $27 price is short of offers made previously by private equity firms, of $33 in November 2022 and $38-40 in 2010.

JPMorgan suggested the deal would introduce significant execution and operational risk over the protracted implementation period which could have negative value implications for Perpetual shareholders.

Citi notes on its SoTP valuation, Perpetual is worth $29.20.

Foreseen?

CLSA suggested yesterday “it is clear that the strategic review is Perpetual’s response to the takeover proposal”, as its alternative to realising the value of the underlying businesses. Given the offer followed the review announcement, rather than preceded it, this would imply Perpetual saw it coming.

Management has historically been reluctant to divest the PCT business, CLSA notes, saying its combination of businesses “provides earnings stability and optionality to invest through cycles”.

But with Soul Pattinson stalking, and brokers agreeing a sum-of-the-parts valuation suggests a break-up of businesses would release value, it appears Perpetual’s hand was forced.

Watch this space.

Morgan Stanley is Overweight on Perpetual and has a target of $28. Citi is Neutral, but has lifted its target to $25.65 from $22.10.

Jarden has lifted its target to $26.80 from $27.10, and retains Overweight.

JPMorgan has an unchanged target of $26 and an Overweight rating.

CSLA did not provide a target or rating in its report, but did note the PWM division is focused on high net worth clients and targeted niches, rather than being a mass-market provider. Hence this broker believes it is a high quality business, and suggests Perpetual would need to see a higher valuation for a divestment to occur.

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